FYI | Aug 22 2006
By Greg Peel
FN Arena warned yesterday that despite all the fundamentals pointing to a lower oil price – end of the Lebanon crisis, better news from Alaska, the end of the US driving season and so far no hurricanes – it would be dangerous to forget that Lebanon had only drawn temporary focus away from the real problem of Iran and its nuclear ambitions.
Iran is due to respond tonight to UN calls to cease uranium enrichment or face economic sanctions, but already the Iranian foreign minister has suggested that when negotiators sit down with representatives from Western governments, uranium enrichment will not be on the agenda. One thus wonders what will be.
Tehran will likely reject the UN package of incentives that has been offered to Iran if it ceases its program by the end of the month. In the meantime, the Iranian army tested surface-to-sea missiles over the weekend which has been taken as a hint that the Strait of Hormuz could well be in Iran’s sights if the UN makes good its sanction threats.
It would be one thing to cut off Iranian oil supply to the world, but by controlling the Persian Gulf Iran can also cut off Saudi Arabian supply. Under this scenario there is no telling how high the crude oil price might rise. The mere threat would still be devastating.
And that was the response in oil markets overnight. After a week of price relief it was as if the world had forgotten about Iran and its nuclear program. The WTI price rallied back over US$72/bbl once more.
The Lebanon crises had seen a flight of capital to the safe haven of the US dollar, but this was not the case last night. There is increasing evidence that the US economy is slowing, and that inflation may have come under control. This leads markets to believe we may have seen the end of Fed monetary tightening.
Not so in Europe, where two more rate rises are expected this year from the European Central Bank. This prompted the US dollar to fall 0.6% against the euro overnight and left no option for safe haven seekers but to return to gold.
Gold rallied 2.25% or US$13.70 to close in New York at US$625.60/oz. Traders reported the return of physical buyers.
Base metals markets were also strong overnight with nickel up 1.7%, copper up 2.4% and zinc up 3.4%.
Wall Street was in profit-taking mode but the Australian SPI futures overnight contract rallied 10 points and the signs are for possibly a good day on the local bourse with no real biggies set to release profit reports.